Natural gas outlook: Crude oil-to-natural gas price ratio over 50

Last week, the crude oil-to-natural gas price ratio (the Brent crude oil price in dollars per barrel divided by the Henry Hub natural gas price in dollars per million British thermal units (MMBtu)) passed 50—reaching 54.36 on March 6, 2012. The ratio, which gauges the fuels' relative market value, averaged only about 9 from 2000 to 2009. The relatively high price of crude oil has led to a decrease in natural gas-directed rigs, as producers have shifted their focus to crude oil and natural gas liquids. At a price ratio of 50, crude oil is roughly eight times more valuable than natural gas on an energy-equivalent basis.

Large declines in rig counts have occurred in the Haynesville Shale in Louisiana, which has a mostly dry natural gas profile.

Rig counts in the Marcellus Shale have remained mostly flat in the last year, although recent company announcements indicate increased activity in the "wet" (liquids-rich) areas of the play in Western Pennsylvania.

Growth in natural gas and oil rigs has occurred in the wet portions of the Eagle Ford shale, located in Southeast Texas.

Overview:

(For the Week Ending Wednesday, March 7, 2012)

The multi-week downtrend in natural gas prices across the country continued throughout the report week, with the exception of some brief upticks that were followed by quick reversals. The Henry Hub price closed at $2.24 per MMBtu on March 7, down 20 cents for the week.

At the New York Mercantile Exchange (NYMEX), the April 2012 natural gas contract fell 31.4 cents per MMBtu for the week to close at $2.302 per MMBtu.

The natural gas rotary rig count, as reported March 2 by Baker Hughes Incorporated, fell for the eighth week in a row, decreasing by 19 to 691 active units, the lowest since August 2009. Meanwhile, oil-directed rigs increased by 28 to 1293, 61 percent above the year-ago level.

Prices:

In keeping with the decline in natural gas prices across most of the country, the Henry Hub day ahead price fell 8.2 percent, from $2.44 per MMBtu the previous Wednesday to $2.24 per MMBtu yesterday. With the exception of a slight (1 cent) gain last Thursday, the price fell consistently throughout the week as warmer temperatures moved across most of the country.

At the NYMEX, the April 2012 contract fell from $2.616 per MMBtu last Wednesday to $2.302 per MMBtu yesterday, a decrease of 31.4 cents (12.0 percent). The most substantial drop was a loss of 12.9 cents on Monday, likely as a result of forecasts for extended warm weather across all but the western portions of the country.

The recent downtrend in natural gas prices continued across most of the country through the week with few exceptions. The most notable exception was for deliveries into the Northeast, where many trading points saw double digit gains on both Friday and Monday, likely as a result of cooler temperatures. These were followed by sharp reversals as the cold temperatures were replaced by warmer weather, with Northeast prices ending the week down. A storm moving into the West likely led to some single digit gains at a number of Western trading locations on Monday, but overall the Western hub prices declined on the week along with the rest of the country. The Algonquin citygate price for delivery into Boston, which began the week at $3.37 per MMBtu, jumped 30 cents per MMBtu last Thursday, 31 cents on Friday, and 70 cents on Monday before falling by $1.56 per MMBtu on Tuesday and subsequently ending the week at $2.97 per MMBtu, down $0.40 per MMBtu for the report week. In contrast, spot prices at Transcontinental Pipeline's Zone 6 trading point for delivery into New York City started the week at $2.66 per MMBtu, traded during the week (Wednesday to Wednesday) within a 25 cent per MMBtu range, and closed the week yesterday at $2.44 per MMBtu (down 8.3 percent). Over the same period, the Chicago citygate spot price registered an 18 cent per MMBtu price loss, ending the week at $2.32 per MMBtu (down 7.2 percent), and the Northwest Sumas spot price declined 33 cents per MMBtu,to end the week at $2.16 per MMBtu (down 13.3 percent).

Although showing substantial gains on Sunday and Monday, consumption had dropped significantly by yesterday and registered an overall decline for the week. According to estimates from BENTEK Energy LLC (Bentek), domestic natural gas consumption fell by 3.2 percent from last week. The residential/commercial sector decreased the most with a 5.4 percent decline, while the industrial sector declined by 2.0 percent, and the power sector ended the week with a 0.8 percent decline.

Despite an increase in imports from Canada, a decrease in dry gas production and lower LNG sendout led to a decline in overall supply over the week. According to Bentek estimates, the week's average total natural gas supply declined 0.8 percent from last week's level, led by a 0.7 percent decrease in dry gas production. Although down for the week, domestic weekly dry gas production was 7.5 percent above this time last year. The decrease in this week's dry gas production was partially offset by a 1.9 percent increase in imports from Canada, with the highest volumes flowing into the Northeast as temperatures fell on Monday and Tuesday. Imports from Canada stand 8.2 percent above year-ago volumes for the same week. Despite the colder temperatures in the Northeast, U.S. LNG sendout declined 34.8 percent over the week and remained 68.5 percent below year-ago levels.

Storage

Working natural gas in storage fell to 2,433 Bcf as of Friday, March 2, according to EIA's WNGSR. This represents an implied net withdrawal of 80 Bcf from the previous week, which is less than both the 5-year average implied net withdrawal of 92 Bcf and the year-ago implied net withdrawal of 63 Bcf for the week. Inventories in all three regions posted declines, with the East Region contributing the most to this week's implied net withdrawal, with a decrease of 60 Bcf (a 5.1 percent decline from the previous week's level).

Stocks were 792 Bcf higher than the 5-year average level of 1,641 Bcf and 739 Bcf higher than last year at this time. Inventories in the Producing Region remain 352 Bcf (57.2 percent) above the region's 5-year average of 615 Bcf. Stocks in the East and West Regions are also above their 5-year averages by 333 Bcf (42.6 percent) and 108 Bcf (44.3 percent), respectively.

Temperatures during the week ending March 1 were 2.7 degrees warmer than the 30-year normal temperature and 3.0 degrees warmer than the same period last year. During the week all regions with the exception of the West were warmer than normal. The South was particularly warm, with the South Atlantic and East South Central Regions averaging 6.9 and 6.4 degrees warmer than normal, respectively. The average temperatures in the Pacific and Mountain Regions in the West were cool, averaging 3.9 and 2.1 degrees cooler than normal, respectively. Heating degree-days nationwide were down 10.1 percent from normal and 11.6 percent from last year.